When you take out a loan, you will likely make equal monthly payments until the loan is paid off. These monthly payments are applied to both monthly compounded interest and the equity of the loan. The is called amortization. At the beginning of your loan period, most money is paid toward interest with only a small fraction applied to equity. As time progresses, the reverse is true. However, your monthly payment never changes. The monthly amortization formula allows you to calculate these regular monthly payments given the loan amount, length of the loan and interest rate.
1. Divide the annual interest rate by 12 to calculate the monthly interest rate. As an example, if you borrowed $30,000 at 6 percent interest on a five-year loan, you would divide 0.06 by 12 to get a monthly interest rate of 0.005.
2. Add 1 to this number. In the example, this gives you 1.005.
3. Raise this figure to the nth power, where "n" is 0 minus the number of months in the loan. In this example, multiply 5 times 12 to get 60 months. You would then raise 1.005 to the power of negative 60 to get 0.741372.
4. Subtract this number from 1. In the example, this leaves 0.258628.
5. Divide the monthly interest rate by this figure. In the example, you would get 0.0193328.
6. Multiply this figure by your original loan amount to calculate your monthly payments. In the example, you would have 60 monthly payments of $579.98.
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